The federal cabinet is likely to approve the draft Stock Exchanges, Corporatisation, Demutualisation and Integration Ordinance 2007 on Monday, empowering the Securities and Exchange Commission of Pakistan (SECP) to disallow brokers not to exceed the approved percentage of shareholding, sources in the Commission told Business Recorder.
The Ordinance, which is expectedly to be promulgated soon after the approval of the cabinet, has been revisited thoroughly by a ministerial committee headed by the caretaker Finance Minister, Dr Salman Shah.
Though, the cabinet, in its previous meeting was ready to approve the Ordinance in principle, but the absence of the caretaker Finance Minister, due to his engagements abroad, has given them more time to revisit the Ordinance clause by clause before its promulgation, the sources added. According to the draft law, within 45 days of the promulgation of the proposed Ordinance, a stock exchange shall, after obtaining approval of its board of directors, submit following documents to the SECP:
a) Valuation of its assets and liabilities as on June 30, 2007;
b) Proposed structure of its authorised and paid-up capital;
c) Particulars of its initial shareholders and the number of shares to be allotted to each share holder;
d) The names of the directors nominated to act as first directors;
e) Copy of its memorandum and articles of association;
f) Copy of the approved development plan.
The Commission would communicate its approval within one month of the receipt of information from the stock exchange.
Within 30 days of the grant of approval, the stock exchange would adopt the memorandum and articles of association, allot 100 per cent shares in CDC book account and issue Trading Rights Entitlement (TRE) certificate to each initial shareholder.
After that, the process of disinvestment and issuance of further shares would start, the sources said, adding that the share of strategic investors and local financial institutions would be 40 per cent followed by 40 per cent by brokers and 20 per cent by general public.
The sources said that when the Ordinance was placed before the SECP board in October, few of the members expressed their concern as to whether it would be possible to achieve the desired objective which demands separation of ownership and management of a stock exchange.
"SECP board members apprehended that after public offering of 20 per cent shares and with the possible increase in shareholding of brokers, their indirect influence in the management cannot be ruled out," the sources added.
Board members had proposed that there should be an overall upper ceiling on shareholding of brokers and in case of any deviation from prescribed formula; Commission may be given special powers to direct divestment.
The members were also of the view that it appears difficult for the strategic investor to retain management control on the basis of maximum 40 per cent shareholding as proposed.
In this context, it was suggested that in order to achieve the requisite objective, introduction of different classes of shares may be considered by the Commission.
However, Chairman SECP explained that such a proposal was discussed in various meetings with the stakeholders and a consensus could not be reached on the issue.
The brokers had apprehended that it may affect the share price of stock exchanges when offered for sale if shares had varying voting rights.
The Chairman had desired that the Commission must retain power to reduce the overall percentage of shares held by the trading rights holders as they would not be allowed to hold shares in excess of 40 per cent of the paid-up capital.
According to the draft Ordinance, SECP shall be empowered to impose Rs 20 million penalty on a stock exchange for not complying with its orders.
"Stock exchange, shareholder, TRE certificate holder or a committee member to which a direction is issued under section 24 or any other section of the Corporatisation, Demutualisation and Integration Ordinance, 2007, shall be bound to comply and any failure on their part will be considered as an offence," the draft further said.
In chapter five of the proposed draft of the Ordinance, the Commission, however, has clarified that it would give a reasonable opportunity of hearing and if any of them was committing an offence knowingly and willfully, a penalty not exceeding Rs 20 million may be imposed. For such a violation, SECP would be empowered to cancel or suspend registration of the stock exchange.
However, each director, shareholder, TRE certificate holder and committee member if found guilty of committing an offence under the Ordinance, would pay to the Commission from his own sources by way of penalty a sum not exceeding Rs one million. Any amount directed by the SECP to be paid under sub-section 2 would be recoverable as land revenue arrears.